The recession in Iran accelerated in 2019/20 as US sanctions progressively tightened. Iran’s GDP contracted by 7.6% in the first 9 months of 2019/20 (Apr-Dec 2019) largely due to a 37% decline in the oil sector. Since the reintroduction of US sanctions in 2018, oil production has dwindled reaching a record low of 2 mbpd in December 2019. Non-oil GDP growth in Apr-Dec 2019 was close to zero, a marginal improvement compared to the sector’s 2.1% contraction in 2018/19. In the same period, non-oil industries grew by 2% driven by construction and the utilities sectors, while services value-added contracted by 0.2%. The recent COVID-19 outbreak has significantly disrupted trade, tourism and retail business during the busiest period for travel and commerce.
Facing a growing pandemic, low oil prices and increasing sanctions, Iran’s GDP growth is projected to remain subdued in 2020/21-2022/23. The baseline outlook is primarily driven by COVID-19 outbreak reducing oil and non-oil GDP in 2020/21 and two subsequent years of modest recovery. Oil production in 2021/22 and 2022/23 is expected to grow in line with long term domestic consumption growth. The fiscal deficit is projected to widen as revenues fall short of targets and COVID-19 adds to expenditures. The 2020/21 draft budget, though contractionary in real terms, relies on optimistic assumptions. The expected widening budget deficit especially in light of COVID-19 and other exogenous shocks are likely to lead to further debt issuance and withdrawals from strategic reserves.
The current unique situation of Iran’s economy presents significant downside risks for the baseline forecast. The most significant risk is a stronger and more protracted impact of the COVID-19 outbreak through various channels including widescale contractions in commerce, tourism and trade as well as higher production costs. Persistence of lower oil prices and export volumes (e.g., due to a significant decline in China’s oil demand) would result in a substantially larger overall shock and fiscal deficit in 2020/21.